The Coming Bush Recession

President of the United States Economy Alan Greenspan is frustrated. George W., the mere president-elect, won't deal. Worse, Greenspan can't punish W. for not dealing. He can't even credibly threaten punishment, because punishment is just what W. wants. Don't throw me into that briar patch, Br'er Greenspan!

The last two presidents have been willing to strike a deal. Bush the Elder struck it too late, of course. Greenspan began raising short-term interest rates in 1988, at the start of the Elder's presidency, and squeezed and squeezed until Elder cried uncle. Elder finally agreed to raise taxes, despite what the public had read on his lips. But by then, growth had stalled and unemployment had shot upward. Elder was kicked out of office by an electorate worried about the economy, stupid.

When Bill Clinton was elected, Greenspan made the deal explicit at their first meeting: You saw what I did to Elder Bush, he said. I could do the same to you, and you'll be another one-term president. Alternatively, you can take my deal right away.

Forget your giant $50-billion-a-year plan to invest in schools, training, and health care. Cut the deficit instead. Raise taxes and squeeze spending so the deficit shrinks. In return I'll reduce interest rates. And when I do, the economy will boom, and you'll be re-elected in 1996.

Clinton took the deal, and the rest is history. The economy expanded. The stock market soared. Unemployment dropped. True, most Americans didn't get much out of the Booming Nineties. Median income rose a tad, largely because the typical American family put in more hours of work. And the bottom 60 percent of earners ended up with lousier schools and less health care. But, hey, Americans stopped worrying about the economy. Every year of the Clinton presidency, Americans spent more than they earned. Consumer optimism reached record highs.

So now we're at the start of another presidency, and Greenspan is once again ready to deal: Mr. President-elect, give up your silly tax cut, he says. You don't have a prayer of getting all of it through Congress anyway. Tell the public you weren't really committed to it. They'll forgive you, of course. They didn't much care about it, actually. Remember: Bill Clinton gave up his investment plan and got re-elected; you can give up your tax cut and suffer no political consequences.

Give it up, Mr. President-elect, and in return I'll keep the economy moving forward. I've already slowed it way down. You see, it was getting out of control back in 1999. So I raised rates six times since June of that year, including that half-percentage-point increase last May after the Nasdaq had already plummeted.

That sure did the trick, maybe too much. So, on January 3, I gave the economy a surprise one half-point rate cut. The markets loved that. But they crave more.

If you accept my deal, I'll keep cutting rates to steer clear of recession. On the other hand, if you don't take my deal--if you insist on seeking a big tax cut--I won't cut rates nearly as much. As a result, the economy will continue to slow. Instead of a soft landing, I'll give you a hard landing. Maybe even a crash landing. Do we have a deal?

Here's what W. says in response: Alan, you're an impressive guy. I respect you. I harbor no grudges for what you did to my dad. But Alan, no deal. I'm gonna try to get a whopping tax cut anyway. See you in the recession.

W. won't deal for three reasons. First, he knows that the most important thing in the minds of voters come election day isn't how bad or how good the economy is but the direction it's heading. In this respect, the 2004 election looks very different at the start of the W. presidency from the way the 1996 election looked at the start of Clinton's. When Clinton came to office, the economy was a basket case. Unemployment was 7.5 percent. Clinton knew it needed to be moving full throttle, soon, if it was to lift off by 1996.

But the economy that W. inherits is still on fast forward even though Greenspan has slowed it down. Unemployment continues to hover at around 4 percent.

No expansion has ever lasted this long. But W. wouldn't mind if it slowed further, or even stalled, in 2001. This would get the worst out of the way early in his administration--wring the economy dry of excessive debt, excess capacity, overemployment, and the few remaining unionized spots where blue-collar wages and benefits remain generous and jobs secure--and increase the likelihood of a rebound in 2004. Bush the Younger would be spared the fate that befell his father in 1992, when Elder failed to bring his recession to a close well before the election.

An economic stall in 2001 would also allow W. to blame the Clinton administration, which, he'll say, failed to cut taxes to keep the economy going full tilt. And finally, it would make more credible his own tax cut intended to stimulate the economy back to robust health.

This is the reality that has Wall Street quivering and Greenspan shivering. W. won't deal. He's looking forward to the briar patch. ¤